January 8, 2020

The Nasdaq has printed four major accumulation days in the last six outings. This is an uncommon occurrence and speaks to the conviction that institutions have toward this market.

Whereas announcements related to the U.S.-China trade talks produced all sorts of market-moving gyrations, the Mideast situation can be expected to produce more of the same.

The view here is that speculators should stick to their guns and pursue the strategy with little regard for what might or might not happen overseas. Otherwise, we become market forecasters trying to predict what we think might happen.

Along these lines, in ’03 I was running a hedge fund when U.S. troops began their initial march toward Baghdad from Mosul in the north. There was much talk about Saddam having chemical and biological weapons that were awaiting the U.S. forces upon their arrival. As a result, I put the fund in cash. Then, the market staged a big rally before the Americans ever reached Baghdad. Somehow, it “knew” there would be no weapons of mass destruction waiting the U.S.

It was right.

A day or two went by before I felt it was safe to wade back into stocks. By then, certain names had decisively broken out, and we had lost some initial performance tacked up by some of the leaders.

Lesson learned: Even when things seem obvious and perhaps scary, never predict.

Otherwise, in Sunday’s report, it was noted that “a partial long exposure is warranted given the underperformance of the growth sector and the lukewarm post-breakout follow-through of a number of names.”

The next day, a number of Focus List triggered trades and growth stocks in general started to show better tone. Four Focus List stocks broke out on Monday and this was followed by additional positive action Tuesday and today. Finally, the enterprise software group, which last week did not keep pace with its heady showing the week before, started to come alive. Volume, however, still leaves something to be desired in this group, with some exceptions like COUP.

Among the names, Applied Materials (AMAT) is a bellwether among the semiconductor crowd. Most Wall Street analysts look for earnings growth of 22%/18% in the October ‘20/’21 fiscal years. Revenue growth has been -14% and flat in the last two quarters. A 95 RS stock in a 98 RS group with B+ acc/dis rating.

AMAT forms a seven-week pattern with a reasonable 13% depth. The stock can be taken above the 63.07 pattern high. This is considered a liquid glamour and may pursue a slower rate of appreciation than other names. With that said, there are times in any market cycle when the liquid glamours tend to outperform their smaller counterparts as large investors prefer perceived safety and lower risk. Earnings expected Feb. 13 (unconfirmed)

Dexcom (DXCM) develops glucose monitoring systems for patients with diabetes. Earnings growth is expected to be 32% this year, while sales expanded 39% and 49% in the last two quarters. A 97 RS stock in an 89 RS group with a B acc/dis rating.

Tuesday, price came out of a five-week pattern, +2.4% on +27% volume. It stands 0.5% past its pivot and can be taken above today’s high of 235.76. Earnings expected Feb. 5 (unconfirmed).

Docusign (DOCU) shows earnings estimates of 127%/64% for the January ‘20/’21 fiscal years. The enterprise software issue grew sales by 41% and 40% in the last two quarters. A 93 RS stock in a 74 RS group with an A- acc/dis rating.

The price chart is a little bumpier than preferred, but there is no mistaking the impressive earnings and revenue growth. Ditto for the extreme accumulation. Today saw volume of +78% on a 1.4% price rise. It can be taken above today’s high of 76.90. Earnings expected Mar. 5 (unconfirmed).

Insulet (PODD) develops insulin infusion systems for diabetics. Earnings growth is forecast at 340%/227% for ‘19/’20. Revenue rose 43% and 27% in the two recent quarters. A 97 RS stock in an 81 RS group with a B+ acc/dis rating.

After a 30%+ move, price settled into its current, five-week flat base with an attractive 11% depth. It can be taken above the 187.25 pattern high. Earnings expected Feb. 25 (confirmed).

MKS Instruments (MKSI) is predicted to record earnings growth of -44%/42% for this year and next. Sales shrank 17% and 5% in the two recent quarters. An 89 RS stock in a 98 RS group with a C acc/dis rating.

Price forms a 10-week flat base with an attractive 12% depth. It is buyable on a takeout of the 115.12 pattern high. Earnings expected Jan. 22 (unconfirmed).

Lattice Semiconductor (LSCC) is predicted by Wall Street to post 17% earnings growth this year. Revenue growth was flat and 2% in the last two quarters. A 97 RS stock in a 96 RS group with A- acc/dis rating.

Today, price barely cleared the top of its four-month consolidation, +5.5% on +162% volume, before retreating late in the day to close 2% below the lip. LSCC is buyable above today’s high of 21.71.

Paycom Software (PAYC) shows earnings estimates of 28%/25% for '19/'20. Sales expanded 31% in each of the last two quarters. A 96 RS stock in a 74 RS group with an A- acc/dis rating.

Tuesday, price cleared the top of a five-week flat base, +0.5% on -16% volume. Wednesday saw modest follow-through, +1.3% on -2% volume. The stock can still be taken around Wednesday’s closing level of 283.12, which is 1% above the pivot, and not extended. Earnings expected Jan. 28 (unconfirmed).

RingCentral (RNG) is an enterprise software issue with estimates of 5%/14% for ‘19/’20. Sales have expanded steadily: 6 of the last 7 quarters have shown 34% growth. A 95 RS stock in a 74 RS group with an A- acc/dis rating.

The ’20 estimate is unimpressive, admittedly. The robust and extremely steady revenue growth, the constructive chart pattern on both daily and weekly TFs, and the improving group RS rank comprise the thesis. Earnings expected Feb. 3 (unconfirmed).

The stock cleared its pattern-high pivot of 177.99 Tuesday, off slightly by day’s end on +9% volume. After rallying 2.4% today, it stands 2% past the pivot and can be taken around today’s close of 180.89. Earnings expected Feb. 3 (unconfirmed).

Servicenow (NOW) is an enterprise software name with earnings estimates of 30%/30% for '19/'20. Sales rose 32% in each of the past two quarters. An 83 RS stock in a 74 RS group with a B+ acc/dis rating.

NOW forms a five-month consolidation. It can be taken above the 303.17 pattern high. Earnings expected Jan. 29 (confirmed).

In sum, the partial long exposure noted in Sunday's report no longer applies in the wake of three days of better tone among growth stocks. Volume is still lacking in some names upon breakout, though this is not known in advance, in most cases.

Q&A

The following is an email exchange between David Ryan, Market Wizard and three-time winner of the U.S. Investing Championship, and me. We have been friends for nearly 25 years. David was nice enough to allow the publishing of this email.

On Apr 12, 2019, at 4:29 PM, Kevin Marder wrote:

David, do you always insist on big volume to confirm a breakout? And what about Mark M?

From: David Ryan
Sent: Sunday, April 14, 2019 6:25 PM
To: Kevin Marder
Subject: Re: Volume requirement

Kevin,

I actually put the emphasis on the days before and after the breakout and not just the day of the breakout.  One day breakouts on volume are just not enough to keep a stock going for a long move.   I like to see a calm couple of days on low volume before the breakout and a number of up days on high volume the day of the breakout and following.  The more days in row up on volume following the breakout the better.  That shows me that there are a number of large institutions buying at the same time and can’t get their whole position bought in just a day or two, but have to do it over weeks.  I studied this when I was running the New USA Growth Fund at O’Neil.  That is when I came up with the “Ants” on the chart long before Gil ever worked there.

Back in 1995, when I was running the NEW USA Growth Fund, I was following O'Neil rules of not buying or adding to a position that was extended from its last base.  I stopped buying even if I had not finished filling out my full position.  In a number of cases  I found the stock just kept going.  Many of these became big winners.  Why, I thought, did these stocks keep going and become big winners vs. stocks that had just mediocre moves.  The difference was the persistent buying, with volume and a large percentage increase over a 15 day period of time.  I looked at numerous examples of great winners and came with a three rules that in many cases identified the start of a great move.

Here are the rules I came up with:

  1. The stock had to be up 12 out of 15 days.  Sometimes I would accept 11 out of 15 if the 4 down days were very small moves.
  2. The volume had to increase over those 15 days by 20% to 25%.  The bigger the volume increase the better.  You average the volume over that 15 day period, so the volume doesn't have to be up big on every day.
  3. The price gain had to be at least 20% during that 15 day period.  These characteristics showed up when there was big institutional buying and usually a number of funds at the same time all fighting to get their position in the stock.  They were so big that they had to do their buying over a number of weeks.  This was usually the start of a very big move.  If you weren't buying during that first move, you would just wait until you got a pullback or a new base formed.  A programmer at O'Neil took those rules and programmed so I could see when those conditions were met.  Little black marks or "ants" were then place above the price bars. See for yourself and study some big winners to find that these elements are found at the beginning of big moves.

A word of caution, if you see these same characteristics after a stock has had a big move over 1 1/2 to 2 years, you are probably near the end of a climatic move and should avoid the stock.

Mark also wants to see big volume on the breakout.

David

Kevin Marder

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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2020. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held a position in COUP and LSCC, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.